Riksbank Cuts Repo Rate To Counter Economic Gloom

12/18/2012 5:17 AM ET

Sweden's central bank on Tuesday slashed its key interest rate by a quarter point to support the economy that has been hit by the weak developments in the euro area.

"The weak developments in the euro area are clearly affecting the Swedish economy, which is now slowing down," the Riksbank's executive board said while announcing its decision to cut the repo rate by 25 basis points to 1 percent. The bank has reduced the repo rate four times since December last year.

The repo rate is expected to remain around this low level for the year ahead. The bank forecasts the repo rate to be around 2.5 percent by the end of 2015.

The central bank also lowered its growth predictions for the economy, cutting the gross domestic product forecast to 1.2 percent in 2013 from the previously projected 1.8 percent. GDP growth in 2012 is estimated at 0.9 percent. The economy is expected to grow around 3 percent in 2014 and 2015.

Riksbank noted that sentiment has clearly declined among both households and companies. Also, redundancy notices and employment plans point to a further weakening of the labour market in the coming year.

Inflation is low and is expected to be lower in 2013 than expected, partly as a result of lower energy prices. Lower resource utilisation and lower wage increases will also contribute to subduing inflationary pressures going forward.

The central bank now forecasts the consumer price index to rise 0.3 percent in 2013, weaker than the previous prediction of 0.7 percent increase. In 2014, inflation is seen at 2.3 percent, lower than previously forecast 2.4 percent.

Deputy Governor Karolina Ekholm supported the decision to cut the repo rate by 0.25 percentage points, but entered a reservation against the repo-rate path in the Monetary Policy Update. She advocated a repo-rate path that is lowered to 0.75 percent at the beginning of 2013.

Deputy Governor Lars Svensson also entered reservation against today's decisions. He advocated lowering the repo rate to 0.75 percent and then a repo-rate path that stays at 0.5 percent from the second quarter of 2013 through the first quarter of 2014.

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